The Colorado Public Utilities Commission last week voted down a compromise agreement between Xcel Energy and three community solar installers that stakeholders say would have corrected flaws in the state’s stalled community solar program.

In February, Xcel Energy reached a deal with Clean Energy Collective, Community Energy Inc. and SunShare to add 60 megawatts of community solar through a request for proposals this year. The deal also included a carve-out for Xcel to own up to 4 megawatts of community solar, exclusive to serving low-income customers and nonprofit organizations.

The agreement stemmed from criticisms that Xcel had been slow-rolling the state’s community solar program in 2014, and that the program structure led to negative renewable energy credit (REC) prices in a bid for 29.5 megawatts of solar 2015.

RECs represent the environmental value of renewable electricity. Utilities in states with renewable portfolio mandates are required to purchase RECs to meet their requirements.

Unlike in REC markets on the East Coast, there’s no floor on REC pricing in Colorado. So last fall, as companies sought to win projects under Xcel’s 2015 request for proposals, REC bids came in at negative prices for the first time ever. As a result, solar developers had to pay Xcel to take their RECs rather than get paid for generating them.

With no floor price, it was a race to the bottom in order to win capacity. Xcel argued last fall that negative RECs are good for customers, but solar companies believe they’re illegal and undermine the intent of Colorado’s community solar policy. (Although they still bid them anyway.)

The collaborative agreement seemed to offer a nuanced and mutually acceptable solution to the negative REC issue, while boosting the overall size of the community solar program through 2016. But regulators disagreed, voting it down 2-0, with one commissioner abstaining.

In a press release, the PUC said the deal was not in the public interest because it was inconsistent with previous decisions and existing statutes, and it was likely to raise the cost of renewable energy for customers.

The PUC took issue with the proposal that Xcel would pay a rate of 3 cents per kilowatt-hour for RECs produced by the 29.5 megawatts of community solar bid out in 2015, rather than the negative REC prices offered in the request for proposals.

The higher REC price made it unlikely that the settlement would result in cost-effective implementation of the community solar garden program, according to regulators. PUC staff estimated that the settlement would increase the cost of developing the solar gardens by “hundreds of thousands of dollars per facility.”

Stakeholders were dismayed and confused.

“We are very concerned that the PUC's rejection of the community solar settlement throws this vibrant part of our solar market into a period of damaging uncertainty,” Rebecca Cantwell, executive director of the Colorado Solar Energy Industries Association, wrote in an email. “We disagree that the settlement would cost ratepayers more, and in fact think it will be more fair and less expensive to ratepayers overall.”

Mark Stutz, a spokesperson for Xcel Energy, said the utility is “disappointed” by the decision. “We felt this was a good deal for our customers, and solar companies agreed,” he said.

Xcel is waiting to add further comment until the PUC issues its official written order, which is expected sometime within the next week. Stutz said Xcel would consider appealing the decision, but that no further action had been determined at this time.

The devil in the details

Karen Gados, chief of staff at SunShare, believes the settlement deal was misunderstood, which stems in part from the complex nature of Colorado’s bill credit system.

In Colorado, for every commercial customer, there is an individual tariff for each meter. A commercial customer’s dollar credit is calculated based on that user’s electricity rate, including the demand charge. So if an erratic, high-energy user like a baseball stadium pays 30 cents per kilowatt-hour and then goes solar, they’re credited for excess generation at 30 cents per kilowatt-hour.

Under these conditions, solar companies could continue to craft viable solar deals in a negative REC situation because they could sell solar at a higher price and still save money for a commercial customer with high, erratic rates.

“It is possible, as a solar developer, to submit a negative REC bid if I’m only going to enroll demand customers and never serve residential or low-income subscribers,” said Gados. “But we don’t think negative RECs are permissible philosophically or legally.”

The Colorado Community Solar Gardens Act states that the purpose of the law is to bring access to solar energy to renting, low-income and agricultural customers. The current market structure means those customers are underserved, and yet they’re paying a small surcharge to support Colorado’s overall renewable energy initiatives, which includes the shared solar program.

“So if I have a program structure that is forcing me to bid negative RECs, I can only afford to serve large commercial customers, and I can no longer serve any residential or low-income people, which is not fulfilling the intent of my business or the intent of the law,” Gados explained.

Xcel Energy doesn’t necessarily have a problem with negative REC prices. Last year, the utility said negative RECs result in a savings for consumers -- similar to the PUC’s argument. However, Xcel has an interest in expanding solar equitably across the state. Also, the fact that each commercial customer has its own unique tariff and dollar credit creates an enormous administrative burden on the utility.

The compromise deal addressed that issue by establishing a fixed credit of 6.8 cents per kilowatt-hour for all customers so that Xcel didn’t have to calculate individual tariffs for nearly 30 megawatts' worth of solar projects.

The fixed 6.8-cent credit makes solar look less appealing to high-demand commercial customers, but it makes solar possible for renters, low-income residences and agricultural customers. Lowering the credit payment for some customers also justifies the 3-cent REC  payment -- it simply shifts the type of payment Xcel ultimately recoups.

“Changing the dangerous precedent of negative RECs to 3-cent REC pricing would be balanced by changing the bill credit calculation so that all are based on a class average,” said Cantwell. “That would eliminate the privilege of large customers receiving favorable custom bill credits while making pricing more accessible for residential, low-income and small-business customers.”

“We hope to help the commission see this perspective on an appeal, and to go forward with a competitive solicitation for the next round that includes this fairer method of billing,” she added.

The 3-cent REC price floor only applies to the 29.5 megawatts bid out in 2015. The floor price goes away in 2016. Also, Xcel will seek competitive bids for the 60 megawatts of community solar proposed for this year. The only difference going forward is the new fixed-credit rate.

Because negative RECs were bid, the 16 megawatts of solar awarded to SunShare, projects worth tens of millions of dollars, are now on hold, said Gados. SunShare and other installers are waiting to broaden the pool of potential customers.

Gados believes the PUC simply didn’t understand the nuance of the deal. It took six months for Xcel and the three solar installers to come up with the plan, and it was debated at the PUC for less than 30 minutes, she said.

“We think there was a misunderstanding,” she said of the PUC ruling. “We don’t think they understood there is a decrease on the bill credit side, which makes this net-neutral for ratepayers and potentially offers cost savings for ratepayers.”